Calculate your expected utility if you invest

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Reference no: EM132491983

You are faced with the following decision tree of either investing or not investing. The decision tree shows your wealth after the different outcomes. For example, your base wealth is $40,000, which is what you will have if you don't invest. If you invest, you have a 0.45 probability of gaining $50,000, which would give you a wealth of $90,000; and a 0.55 probability of losing $30,000, leaving you with a wealth of $10,000. Suppose you are risk-averse and have the utility function U = W0.5

Calculate your utility if you don't invest.

Calculate your expected utility (EU) if you invest.

Given your utility function, should you choose 'Don't invest' or 'Invest'?

Reference no: EM132491983

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